No Such Thing As A Free Lunch

Sure, that works.

Capitalistic market....Again, sure, but the government has a mandate to provision itself. So it is also part of the market framework as it demands goods and services from the market.

Here is where we get away a little from the question I meant to ask, but I do appreciate you citing the question as you understand it and give me an opportunity to clarify.

I agree that the nation began using gold and silver as trade, however, at the time, the US government wasn't operating under fiat standard as it does today, however, the use of "bills of credit" were hotly debated by the founders when discussing money. Many understood, even then, the power of paper currency. Many understood that the revolutionary war wouldn't have been won without paper money which is why the creation of "credit" wasn't strictly prohibited in the Constitution, though there was a healthy fear that it could be abused. Much of the dislike of paper money was based on the fact that the government could create it, but it had no way to take it out of the hands of those in the private sector. Figuratively, imagine a sink with a faucet and a drain, if the government created money (faucet) without a drain, then adding money will fill up the sink (the economy), taxes weren't created to fund spending, but prevent inflation.

Which seems only to prove the point I make quite often. The government could create paper money and spend it going all the way back to the Revolutionary War, which in turn proves that the government never had any shortage of money, the limitation of money creation since the nation's very beginning has always been inflation which in turn is limited by real resources, labor and the skills of real people.

But I digress....I'm off my own topic.

To your point, the US government didn't start its system of money as a fiat system. The question I meant to ask but explained poorly in retrospect, was to imagine a government that if it started today, operated purely under a fiat standard.

How would it begin? How would money enter circulation if the government only accepted the dollars it creates in payment of taxes. Thus, unless the government spends first how can it possibly collect taxes?

Given this statement, let's imagine that the nation in my hypothetical did not have native access to silver or gold or some other extremely scarce commodity, do you think a purely fiat driven system is impossible then?

That's not fiat, that's paper with a commodity backing like we had from 1934-1973. I believe you could redeem dollars for silver on demand until 1967. I'm asking how dollars would move from government to the private sector in a pure fiat currency as we have today.

Ok, so I agree, make the government's money legal tender, though today, it's not illegal to make payment in something other than US dollars, I think the distinction is that, should a misunderstanding occur, the government will either enforce the terms of a legal contract, where both sides have agreed up front to accept a trade of something other than dollars, but if the contract is poorly written or there is no contract, the government can only force the debtor to make restitution in dollars and the payee can only demand dollars.

How would currency be "made available" to the banks? With all due respect, I don't want to sound snarky when I say this, but you do realize that banks create loans from nothing, right? They don't lend money on deposit. This was the failure of QE. QE pushed trillions of dollars into the banking system because someone at the Treasury/ Fed still believes Friedman's Quantity Theory of Money. The problem is, banks don't lend money from the vault to customers.

If you don't understand this, I highly recommend Perry Merhling's course on Money and banking. It's a free college-level course you can take online, https://www.coursera.org/learn/money-banking

Minsky said, "Anyone can create money, the difficulty is getting people to accept it."

The US dollar, strictly speaking, isn't backed by anything in a literal sense, well, except the promise that dollars will settle your tax debts with the government. If you walked into a Fed member bank with a $20 bill, the best you could hope for is (2)-$10's or (4)-$5's, though I take your point. It is the productivity of the nation that helps bring extrinsic value to the dollar, but that's not a "backing" by any meaningful definition. There is no direct convertibility of dollars to a quantity of any good or service, but I suspect you already know this. Having said that I know what you really mean when you say that, but you're using the terms wrong.

Now it's interesting. The government does not need to hold property or tax money away in order to have money. The best example of this was the Greenbacks Lincoln created. He simply created money and spent it to fund the war against the south. It was a true fiat currency. Its flaw was that at some point the amount of money in circulation exceeded the economies ability to supply goods and services. When demand exceeds supply inflation sets in. Now if Lincoln had a way to tax some of the money back out of the system, it would have reduced the amount of money in the economy and made it possible to spend more without creating inflation.

It's really hard to explain until we come to some sort of agreement (or lack thereof) on these other points. We'll come back to this

 

A SIMPLE ECONOMIC DEFINITION OF "MARKET-ECONOMY"

A market is defined in economic in this manner (from here):

Very simply, they are mechanisms of exchange of value. If you have nothing of value, no one will want to exchange with you.

Markets dominate all market-economies and their "fairness" is of prime importance. Not just for the seller making megabucks, or the buyer (you, me or any other individual buyer) who are producing the market's goods/services being.

Which is why the same question regarding Market Fairness can be applied to the market for worker-services (aka "labor"). Capital provides investment to build the mechanism of production, but people must "work" to produce goods/services. Also, they are paid for their work, which provides the means for them to purchase goods/services - in this duality, we are all both producers and buyers.

Profit is the mechanism that generally defines the success of any market-seller. But what is the mechanism that defines how well workers are returned a fair-income for the work they provide?

There is none. Because none was ever thought necessary.

The fact of the matter is, however, that market-economies provide an extremely wide range of incomes for workers - from highly unfair at the very bottom, to mostly fair in the middle to extremely unfair at the top.

Howzatt - "unfair"?

That is the crux of the matter. At what stage does taxable income become "unfair"? There's an answer to that question* - but that's not my point.

MY POINT

We are not even asking the question and so there are no answers, and thus no debate ...

*Is it 5 times the median income, or 50 times or 500 times?

 

Spending your money really shouldn't be about providing people a fair income. It should be about accurately communicating your perception of economic conditions.

Here are the two most relevant papers written by Nobel prize economists...

The Pure Theory of Public Expenditure (1954) - Paul Samuelson
The Economics Of Earmarked Taxes (1963) - James Buchanan

From the first paper...

This is the only real economic justification for compulsory taxation. And it's a good justification! If you ask your readers how much they value an article on your website, and if they know their answer will determine their payment, then they will have a clear and strong incentive to pretend to value the article less than they truly do. Well yeah! Why buy the cow when you can get the milk for free? Except, if too few people pay for milk then the supply will be less than optimal.

But it's really important to appreciate that the premise here is that it's necessary to know how much you truly value national defense, space exploration and public healthcare. False signals are only detrimental if true signals are beneficial.

From the second paper...

If you're subscribing to Netflix anyways, and you can spend your fees on your favorite content, then what's the point of concealing your true preferences for your favorite content? Let's say that your monthly valuation of nature documentaries is $7 dollars. If you try and get a "deal" by only spending $1 dollar on nature documentaries... it's not like you can take the $6 dollars that you "saved" and spend it on artichokes or sneakers. All you can do with the $6 dollars is spend it on less valuable content on Netflix.

 

That is a fact.

It appears a very similar discussion is occurring in more than one thread as I provided the answer to your question already in another thread.

"All government needs to do is mandate the fiat currency it makes available in the banks be used to pay taxes, requiring those who possess property or anything else government wishes to tax to acquire a loan of the governments fiat currency to pay their taxes. And to complicate matters more, some acceptable valuation of all things which were to be traded, labour, products, etc. would have to be determined relative to a newly created dollars value. Who would determine the value in dollars of an acre of land, an hours labour, a pound of chicken or beef, apples, oranges, vegetables, etc.?"

 

Specious BS.

Taxation is not an economic tool the intent of which is to manipulate, coerce or force or even "influence" behaviour. Regardless of how readily we wish to believe it is precisely that.

It has only one purpose, which is to provide to the community at large services that a government deems to be of a "public nature". For instance, police, firefighters, schools, armies and (at least in Europe) national healthcare and higher-education.

And how does a government decide what policies are of a desired "public nature"? By how the people elect their government according to party lines at all three levels - local, state and national.

They got from Obama what they can expect from a Democrat, and they will get from Trump what they expect of a Replicant PotUS. No more and no less.

Period.

You are falling into the classic "scholarly" rat-trap of present day economics. That is, specious nonsense the purpose of which is to enhance personal notoriety in the economics community.

 

Isn't this statement a bit simplistic?

After all, the same companies are fleecing their shareholders with absurdly high prices for pharmaceuticals. So, we should buy their stocks to get a better price?

In Europe, it is the National Health Services that negotiate bulk-prices for drugs employed, which is why the pharmaceutical companies go to the US to make a profit.

Pharmacy prices in Canada are cheaper, but even if Canada has a National Health Service this service does not negotiate bulk-prices.

Certain Canadian regions are, however, negotiating bulk-prices together ...

More about Canada's National Health Service here.

 

Mandate it? You mean declare it legal tender?

The stipulation is that my hypothetical the system would work similar to the economy we have today. The government does "make money available" to banks to lend. Banks require capital and reserves. The government could make reserves available, but initial capital would come from the private sector. If there isn't any money in the economy then there is no capital and there are no banks. If the government were to deposit Treasuries at the Fed and the Fed-created dollars it would deposit those dollars into the government's account so the government could spend them.

The government would simply spend dollars into existence. Every dollar the government created and spent would be the government's debt and dollar assets to the private sector, just like this:


Who would determine valuation? The market of course. Government taxes would create the need for dollars and people would set initial price relative to tax demands. That is, If the government demanded a $100 tax per month on someone's property, then the owners of that property would set prices of their goods with that in mind knowing that they had to make at least $1200 a year. Of course, there are other considerations, but the demands of each person's tax burden would set a minimum floor.

Why would people accept government dollars on day one? Because the government has the authority and capacity to set a tax. Failure to pay the tax comes with a punishment, thus a person's desire to pay the tax will be a sort of propositional calculus. Is it easier to work for the dollars government creates to pay the tax or is the punishment for the tax eaiser than the work it takes to aquire the dollars to pay it? The taxes in a fiat system aren't about funding government, the government can create all the money it wants, taxes create demand for the currency and prevent inflation.

The point is, the only way, in a fiat economy, to add dollars to the economy is either to spend them or give them away. I recommend the former as it creates and sustains businesses.

 

1. Producers make decisions
2. Decisions are based on information
3. Bad information leads to bad decisions

Where, exactly, is the BS?

 

"All government needs to do is mandate the fiat currency it makes available in the banks be used to pay taxes"
Declaring it legal tender and requiring it be used to pay ones taxes. Government does not accept tax payments in the form of produce, only dollars.

Your "hypothetical" is far too simplistic. Your linear image would more accurately display an incline, and a previous posted cyclical image would more accurately display an expanding spiral taking into account inflation. Constant inflation, devaluing currency is the primary means by which constantly increasing government debt is made to appear sustainable/acceptable by the public who are the ultimate debtors of ALL governments debts, and is also the primary cause of increasing wealth disparity.

 

You are preaching simple-notions regarding the Supply-component of a market-economy, in which most "free people" (the Demand element) live today.

You have forgot that decisions of consequence are based upon both "knowledge of factual content" and the "existing condition as stipulated by law":
*The former relates to not only to natural but also regulatory market-conditions. (Which is why Donald Dork wants to tear them down, thus kissing-the-ass of BigBusiness that supported his election financially.)
*The latter is contingent upon rules (law) that have been adopted by the legislative branch of a nation, not those made edicts by a sitting PotUS that are thus revocable by any subsequent duly elected president.

You gloss over the intricacy of decision-making simply because it does not conform with your simplistic view of a market-economy. (Which is a rules-based mechanism.)

And finally, you fail to understand that regulatory-supervision of markets is intended for the general-good of the people. For instance, the fact that America's healthcare costs twice as much per capita as does Europe with its National Health Care systems. Why?

Because Healthcare is fundamentally NOT a competitive-market like consumer goods (light-bulbs or sausages) ...

 

With the exception of a devastating war (ala Hollywood) where all is reduced to rubble, there is ALWAYS money running circularly in an economy. (From Supply to Demand and Demand to Supply.)

Your remark above depends upon what the "initial capital" is intended to accomplish. I will remind you that the "initial capital" spend by the "CERN" in Europe to hire in 1989 Tim Burners-Lee was "public funding". Tim took ordinary software to alphabetize CERN scientific reports and a finder that fetched the texts when called upon to do so by researchers. (The origins of Google, btw, but way before.)

Later he went to ARPANET in the US (also funded by the government) that helped make sure that all such "alphabetized" texts could be searched from research participating agencies.

Thus the Internet was born, without an ounce of privatized money being involved in its origin. It has only since become a major money-maker.

I also maintain that when it comes to national education, that America needs what Europe has developed for Tertiary Education that free, gratis and for nothing. TE is a "gift" from government to the people in Europe - and not a money-spinner as in the US.

So, as regards a market-economy, we have very different notions of the relative importance between private and public funding ...

 

Should taxation be compulsory? If so, then why?

 

TELL ME

Taxation is not be necessary when a people decide that they need no "communal services" - like firefighting, policing, healthcare, education, historic preservation, a national defense, etc., etc., etc.

The US has obviously opted for "communal services" and in a BigWay. That is, 54% of the national Discretionary Budget goes to just one agency. The DoD.

"Tell me where your heart is, and I'll tell you where you are ..."